4   Notes to the consolidated balance sheet

Purchases included under acquisition costs relate to the purchase of the commercial property at Route François-Peyrot 10–14 in Le Grand-Saconnex (CHF 74.3 million) as well as land and transaction costs for the Eikenøtt investment real estate under construction in Gland (CHF 4.4 million).

The commercial properties (CHF 0.4 million) and the investment real estate under construction (CHF 102.6 million) received value-enhancing investments totalling CHF 103.0 million during the period under review.

For disposals arising from the sale of two investment properties, those properties´ market value amounting to CHF 9.5 million (CHF 10.2 million in acquisition costs and CHF –0.7 million in revaluation) as at 31 December 2010 was eliminated from assets.

With the structural completion of the housing complex at Moosstrasse 1–13/Grütstrasse 33–39 in Adliswil, which had previously been recognised under investment real estate under construction, the property with acquisition costs of CHF 59.5 million and CHF 2.0 million revaluation was reclassified to residential properties.

In 2011, the three projects Allianz office building, Wallisellen, Escher-Terrassen, Zurich, and Neunbrunnenstrasse, Zurich, were recognised under investment real estate under construction – along with the acquisition of the Eikenøtt project in Gland – as the preconditions under the accounting and valuation principles (see 2.9) were fulfilled. Acquisition costs of CHF 111.9 million were therefore reclassified (with no impact on income) from development real estate to investment real estate under construction.

In terms of individual regions and property types, the breakdown of acquisition costs and market values as at 31 December was as follows:

[1] From revaluation in comparison with previous year

Costs incurred in connection with the acquisition (purchase price, notary´s fees and property transaction costs, commission payments) are recognised under acquisition costs, as are the actual production costs of the additions from construction activity and value-enhancing investments and total renewals.

The revaluation of the investment real estate is based on the valuation conducted on 31 December by the external real estate valuer using the discounted cash flow method.

Jones Lang LaSalle AG acts as the real estate valuer on a contract basis. There are no further business connections or investments between Allreal and the real estate valuer.

For details of the investment real estate, see pages 118 to 123 of the consolidated financial statements.

The purchases include purchase price payments on the transfer of ownership of land for the Cholplatz Bülach, Lerchenbergstrasse Erlenbach, Stockenstrasse Kilchberg, Bruggächer Mönchaltorf and Guggach Zurich projects.

The reclassifications of CHF 111.9 million net to investment real estate under construction (see 4.1) relate to the three projects Allianz office building (acquisition costs CHF 96.0 million), Escher-Terrassen Zurich (CHF 8.7 million) and Neunbrunnenstrasse Zurich (CHF 7.2 million), which were previously recognised under development real estate.

In the period under review, the 50% joint ownership interest in Bauarena Volketswil with a book value of CHF 36.7 million was sold to a third party.

Other property, plant and equipment comprises capitalised fit-out costs for commercial and sales premises at the Baar, Bern, Wallisellen and Zurich sites (CHF 0.9 million), IT equipment (CHF 0.8 million) and works of art (CHF 0.7 million).

For the pre-financing and securing of a possible construction project, Allreal granted a loan with an indefinite term amounting to CHF 3.6 million to a third party (no repayments, interest-free).

With the proposed acquisition of land, an advance payment of CHF 1.0 million was made to the seller on the basis of a notarised preliminary contract (no repayments, interest-free).

In the Real Estate division, Allreal provided tenants with prefinancing of costs incurred for interior fit-outs of commercial premises which will be repaid by the tenants over the term of their leases on an annuity basis. As of the balance sheet cut-off date, this prefinancing amounts to CHF 5.9 million, with final maturities up to 2031 (annual repayments of CHF 0.6 million, interest rates of 2%–7.5% p.a.).

The value adjustments relate primarily to overdue receivables from ongoing or completed orders in the Projects & Development division. These are formed on the basis of individual assessments of Group Management regarding the recoverability of the balances. The receivables of the Real Estate division include balances owed by property management companies.

The actual losses on receivables in the Projects & Development division amounted to CHF 0.1 million (2010: CHF 0.1 million). For income losses in the Real Estate division see 3.1.

As at the balance sheet cut-off date, the receivables amounting to CHF 5.5 million in Real Estate division are not yet due. The maturities structure for the non-value-adjusted receivables of the Projects & Development division was as follows as of 31 December:

The values reported in the balance sheet conform to the valuation principles described under 2.14 after deduction of payments on account made for each project which as at 31 December are under construction for third parties and have not yet been billed and paid.

The receivables stemming from contaminated sites (CHF 0.7 million) relate to two investment properties in the Real Estate division for which Allreal made advance payments for decontamination work.

The diverse other receivables consist mainly of balances arising from the payment of withholding tax, deposits/security paid for projects of the Projects & Development division and prepaid expenses amounting to CHF 1.3 million, as well as a residual balance of CHF 1.0 million from the settlement of a contract of the Projects & Development division which was completed in 2011 and will be paid for the following year by the third party.

The cash amounting to CHF 71.9 million is freely disposable in the form of current account balances. As at the balance sheet cut-off date, all funds are invested at standard market conditions with Swiss banks with at minimum an "A" rating (if rated).

As at the balance sheet cut-off date, the share capital of Allreal Holding AG comprises 13 664 271 registered shares with a par value of CHF 50 each. Each share carries one vote and confers entitlement to attend the general meeting if entered in the share register. For changes in shareholders' equity, see consolidated statement of changes in shareholders´ equity on page 64.

On 31 December 2011, Allreal held 13 463 treasury shares (31.12.2010: 10 365 shares). The average purchase price per share stands at CHF 137.65 (31.12.2010: CHF 125.10). The total purchase price is deducted from consolidated equity. For changes in the holding of treasury shares see 3.9.

The Board of Directors is authorised by the annual general meeting to increase the share capital – excluding the subscription rights of shareholders as applicable – until 26 March 2012 to acquire businesses, business units, participating interests or real estate through an exchange of shares, for financing or refinancing the acquisition of businesses, business units, participating interests or investment projects, or for the purpose of an international placement of shares worth up to CHF 200.0 million by issuing up to 4 000 000 registered shares each with a par value of CHF 50 (authorised capital). In May 2010, the authorised capital was reduced by CHF 113.9 million from CHF 200.0 million to CHF 86.1 million (as at 31 December 2011) owing to the rights issue.

For the purpose of issuing convertible bonds, warrant bonds or other financial instruments, the annual general meeting of 31 March 2006 created – excluding the subscription rights of shareholders – conditional capital of up to CHF 125.0 million through the issue of up to 2 500 000 registered shares with a par value of CHF 50 each. Bearers of the convertible and/or warrant bonds are entitled to subscribe to the new shares. This conditional capital decreased by CHF 0.2 million to CHF 124.8 million (as at 31 December 2011) following the conversion of convertible bonds into shares.

Further, Allreal Holding AG has conditional capital of CHF 10.0 million (200 000 registered shares at a par value of CHF 50 each) at its disposal for the purposes of issuing options to the members of the Board of Directors and management. This conditional capital has not been drawn on.

In the previous year, 2 277 318 registered shares at CHF 50 par each were created through the rights issue. The conversion of convertible bonds increased the share capital by 360 registered shares at CHF 50 par each in 2011.

The Board of Directors will propose to the annual general meeting of 30 March 2012 a distribution of CHF 5.50 per share, corresponding to a total amount of CHF 75.2 million, in the form of a repayment of reserves from contribution of capital. In the previous year, CHF 74.9 million in reserves from contribution of capital were distributed to shareholders, corresponding to CHF 5.50 per share.

Maturity of the financing (capital lockdown)

The financial liabilities of the Allreal Group consist of bank loans secured by mortgage, a convertible bond and a bond issue. The bank loans in the form of fixed advances and mortgages are extended on a rolling basis. Apart from the 2.50% bond issue and the 2.125% convertible bond, only bank loans with contractually agreed remaining terms to maturity greater than twelve months are reported as long-term financial liabilities.

Long-term borrowings include a 2.50% bond issued in 2011 and a 2.125% convertible bond issued in 2009:

2.50% bond issue 2011–2016

Amount CHF 150.0 million
Issue price 100.45%
Coupon 2.50%, payable annually on 12 May
Maturity 5 years
Redemption On 12 May 2016 at par

As at the balance sheet date, the 2.50% bond issue is recognised at CHF 148.8 million in long-term borrowings and during the period under review, CHF 0.2 million was spent on the amortisation of issuing costs. In addition to the interest rate of 2.50% actually payable, expense, corresponding to an effective interest rate of 2.71%, is also deferred in the income statement.

2.125% convertible bond 2009–2014

Amount CHF 199.95 million (originally CHF 200 million)
Issue price 100%
Coupon 2.125% p.a., payable annually on 9 October
Maturity 5 years
Redemption At latest by 9 October 2014 at par
Conversion price CHF 138.75

Until 19 September 2014, each bearer bond at CHF 5 000 par can be converted into 36.03604 registered shares of Allreal Holding AG. The bond may be redeemed early, and the bond terms customary for such capital market instruments shall apply. Specifically, this includes options for premature redemption either at any time at par, including accrued interest, provided more than 85% of the original principal amount has been converted and/or redeemed, or if the registered share of Allreal Holding AG closes at no lower then CHF 180.40 on 20 trading days within a period of 30 consecutive trading days. As at 31 December 2011, the conditions for premature redemption had not been met.

In accordance with the terms of the bond issue, the capital increase in May 2010 resulted in the subscription ratio being adjusted from 35.08772 to 36.03604 registered shares per bearer bond at par value CHF 5 000. In other words, the conversion price was adjusted from CHF 142.50 to CHF 138.75.

Under IAS 32, when a convertible bond issue is recognised for the first time, it should be subdivided into debt and equity, as the convertible bond comprises “multiple embedded derivatives”. The assignment to equity corresponds to the difference between the proceeds of the issue before issuing costs and the fair value of the financial liabilities, arrived at taking account of a reference interest rate of 3.02%. The issuing costs are split proportionately between debt and equity. The share of equity remains unchanged until such time as bonds are converted into equity.

As at the balance sheet cut-off date, the 2.125% convertible bond is recognised as follows:

This means that during the period under review, CHF 2.9 million was charged to financial expense for the amortisation of the difference between the debt component and the redemption amount.

The difference of CHF 10.2 million between the debt component (CHF 189.8 million) and the redemption amount (CHF 199.95 million) as at 31 December 2011 is amortised over the remaining term to maturity of the convertible bond until 2014 using the effective interest method.

Deferred tax liabilities at the consolidated tax rate of 22% are recognised on the difference between the tax value of the convertible bond and the book value of the debt component, plus proportionate issuing costs, and are written back to income over the term of the convertible bond. In 2011, deferred taxes amounting to CHF 0.7 million were written back in favour of the tax expense.

In addition to the actual interest rate of 2.125% to be paid, the expense which corresponds to an effective interest rate of 3.79%, is also deferred to the income statement.

Maturity of interest rates (interest lock-in period)

The classification of financial liabilities by interest lock-in periods is done on the basis of the actual date of maturity of the underlying fixed advances and mortgages and the maturity of the bond issues and convertible bond. In calculating the capital lockdown and interest lock-in periods, the respective outstanding par values of the bonds and their 2.50%/2.125% coupons were taken.

As at 31 December 2011, fixed advances amounting to CHF 1310.0 million and fixed-rate mortgages amounting to CHF 17.4 million (at nominal values) are in place, all of which were taken out with Swiss banks or insurance companies.

On the balance sheet cut-off date, financial liabilities (excluding bond issues and convertible bonds) existed towards the following banking groups and insurance companies:

In the next twelve months, two interest rate swaps will mature with a value of CHF 100.0 million at 2.37% in December 2012 and CHF 50 million at 3.20% in December 2012.

If Allreal had not concluded any interest rate swaps, 78.1% of the financial liabilities would be subject to variable interest rates and would be exposed to the risk of changes in interest rates in the market (31 December 2010: 83.4%).

The average interest rate of all financial liabilities as at 31 December 2011 is 2.30% (31 December 2010: 2.59%).

The average interest lock-in period for all financial liabilities as at 31 December 2011 is 51 months (31 December 2010: 46 months).

For additional comments on financial instruments see 5.4.

The provisions for construction guarantees cover existing risks arising from completed projects of the Projects & Development division. The other provisions comprise rental guarantees and possible outflows of funds arising from pending litigation in the Real Estate division. In compliance with IAS 11, paragraph 40, provisions for existing risks from current orders (construction risks) are offset directly against the project balances under the receivables or liabilities.

Short-term provisions

Long-term provisions

The provisions were reassessed and adjusted as at the balance sheet cut-off date. In the assessment of the company, the provisions formed are necessary to reflect legal or de facto liabilities arising from previous events in connection with which a cash outflow is likely. The amounts and temporary classification are based on estimates and as such are subject to uncertainties.

Provisions are classified as short-term or long-term depending on whether they are expected to be utilised within one year or later.

Other long-term liabilities totalling CHF 77.4 million (31.12.2010: CHF 48.9 million) relate to the negative replacement values of the interest rate swaps (hedge accounting) with residual maturities of more than twelve months. The tax effects are recognised under deferred tax assets.

The reported values represent liabilities after deduction of corresponding counterclaims for each project, in compliance with the valuation principles described under 2.20; see also 4.5.

In addition to non-cash payables (CHF 2.3 million), diverse liabilities also include liabilities from the settlement of VAT (CHF 1.5 million).

As at the balance sheet date, all holiday entitlement not yet utilised by employees is evaluated on the basis of individual rates of pay and is recognised as an accrual in the consolidated financial statements. As of 31.12.2011, this accrual amounted to CHF 2.0 million (31.12.2010: CHF 2.8 million).

Other current liabilities comprise negative replacement values of interest rate swaps (hedge accounting) amounting to CHF 3.7 million (31.12.2010: CHF 2.0 million) with remaining terms to maturity of less than twelve months.

Accrued expenses and deferred income comprise deferred interest expenses arising from financial liabilities, temporary deferrals of rental income and accruals of real estate expenses, and pending statements of accounts from projects completed by the Projects & Development division.

At the end of the year, the share price stood at CHF 136.50. This represents a premium of 15.9% compared to the net asset value per share after deferred taxes which amounted to CHF 117.75 (31.12.2010: premium 18.7%).